Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, “I” BENCH, MUMBAI
Before: SHRI OM PRAKASH KANT, AM AND
IN THE INCOME TAX APPELLATE TRIBUNAL “I” BENCH, MUMBAI
BEFORE SHRI OM PRAKASH KANT, AM AND MS. KAVITHA RAJAGOPAL, JM ITA No.2643/Mum/2022 (Assessment Year: 2012-13)
Dialog Axiata PLC Dy. CIT, International Taxation- C/o. Mr. Rohit Verma, Ernst & 2(1)(1), Young, Golf View Coporate Mumbai Tower B, Golf Course Road, Vs. Sector 42, Gurugram, Gurgaon, Haryana – 122 002
PAN/GIR No. AAHCD 7691 L (Assessee) (Respondent) :
Assessee by : Shri Hiten Chande : Shri Anil Sant Respondent by
: 19.10.2023 Date of Hearing Date of Pronouncement : 15.01.2024
O R D E R Per Kavitha Rajagopal, J M:
The captioned appeal has been filed by the assessee, challenging the assessment
order dated 04.06.2022 passed u/s. 147 r.w.s. 144C(13) of the Income Tax Act, 1961
(‘the Act') pursuant to the direction of the Hon’ble DRP relevant to Assessment Year
(‘A.Y.’ for short) 2012-13.
The assessee has challenged the assessment order on various grounds, both on the
legal grounds and has also challenged the addition made by the ld. Assessing Officer
('A.O.' for short) along with the other consequential grounds.
2 ITA No. 2643/Mum/2022 (A.Y. 2012-13) Dialog Axiata PLC vs. Dy. CIT(IT) 3. The brief facts are that the assessee company is a non resident telecommunication
operator rendering international carriage and connectivity services to telecom operators
of other countries to facilitate seamless connectivity and carriage of telecommunication
traffic in Sri Lanka. The assessee’s case was reopened by the ld. A.O. u/s. 147 of the Act
for the reason that the assessee has received payment of Rs.4,16,80,240/- during the year
under consideration from M/s. Vodafone South Limited (VSL)which is an Indian entity.
The ld. A.O. observed that the said income was chargeable to tax in India as ‘royalty’ and
that the deductor had not deducted tax at source as per the provision of section 191 of the
Act. The ld. A.O. passed the draft assessment order u/s. 144C of the Act dated
29.09.2021 and determined the total income at Rs.4,16,80,240/- by holding that the
receipts in the form of Interconnect Usage Charges (‘IUC’ for short) are to be taxed in
India as per the provisions of Income Tax Act as well as the DTAA entered into between
India and Sri Lanka and held that as per the provision of section 5 of the Act, the said
receipts are to be taxed as ‘royalty’.
The assessee filed its objection before the learned Dispute Resolution Panel ('ld.
DRP' for short) challenging the draft assessment order passed by the ld. A.O. The ld.
DRP disposed off the objections raised by the assessee vide order dated 31.05.2022 by
upholding the order of the ld. A.O. that the receipts are in the form of Interconnect Usage
Charges which are liable to be taxed in India as ‘Royalty’. The ld. A.O. then passed the
final assessment order dated 14.06.2022 in pursuance of the ld. DRP's direction and
determined the total income at Rs.4,16,80,240/- by holding the receipt received by the
assessee from Vodafone South Ltd as ‘Royalty’ income taxable in India.
3 ITA No. 2643/Mum/2022 (A.Y. 2012-13) Dialog Axiata PLC vs. Dy. CIT(IT) 5. Ground no. 6 pertains to the addition made by the ld. A.O. holding that the IUC
charges received by the appellate are ‘royalty’ under the India-Sri Lanka DTAA. The
facts of these grounds are that the assessee is a telecommunication operator based in Sri
Lanka providing international carriage and connectivity services to telecom operator
located in other countries in order to facilitate seamless connectivity and carriage of
telecommunication traffic in Sri Lanka. The assessee has provided carriage/connectivity
services to VSL for carriage of telecommunication traffic in Sri Lanka as per an
agreeement between the assessee and VSL operator vide a service contract for providing
services of carriage of calls and provision of connectivity for which the assessee is
entitled to receive service charges from VSL. That being so, the assessee is said to have
received Rs.4,16,80,240/- from VSL towards the IUC from VSL during the impugned
year. The assessee contends that as the said payment does not fall within the purview of
section 195 of the Act, as the same is not in the nature of FTS/Royalty, the assessee was
not liable to tax in India, resulting in non deduction of TDS by VSL. The assessee further
contends that it had not filed its return of income in India for the reason that the income
did not accrue in the hands of the assessee in India during the year under consideration.
The ld. A.O., on the other hand, treated the impugned receipt as ‘royalty’ received from
VSL and added the same to the total income of the assessee. The ld. A.O. also held that
the Non Resident Telecommunication Operator (NTOs) received entire IUC on rendering
the interconnectivity services to calls from India or transiting in India which nevertheless
accrues or arises in India. The ld. A.O. further held that the right to such charges
emanates from a caller availing Indian network which continues to accrue till the call is
terminated, thereby holding that the source of such revenue accrues in India. The ld. A.O.
4 ITA No. 2643/Mum/2022 (A.Y. 2012-13) Dialog Axiata PLC vs. Dy. CIT(IT) further reiterated that as income has accrued in India, there was no necessity to invoke the
deeming provision of section 9 of the Act, thereby adding the said receipt to the total
income of the assessee which is liable to be taxed in India as per section 5(2) of the Act.
In an objection filed by the assessee before the Hon’ble DRP, the said addition was
confirmed by holding that the IUC is liable to be taxed in India as per IT Act and the
DTAA entered into between India and Sri Lanka by holding the same to be ‘royalty’.
The assessee is in appeal before us, challenging the final assessment order passed
by the ld. A.O. making an addition on the impugned receipt in pursuance to the direction
of the Hon’ble DRP.
The learned Authorised Representative ('ld. AR' for short) proceeded to argue on
the merits of the case raised in ground no. 6 of the appeal. The ld. AR for the assessee
further contended that the network and the related equipments are used solely by the
assessee for the purpose of providing carriage services to VSL and that no access or
control pertaining to the said network or equipment is provided by the assessee to VSL.
The ld. AR further contended that the assessee has not given any right to VSL to use the
network of the assessee nor was any intellectual property rights pertaining to the assessee
was rendered to VSL as per the service contract entered into by the assessee and VSL.
The ld. AR further submitted that there was no transfer of rights and neither was it a
secret formula or process which consideration would be “Royalty” as per Explanation 2
of section 9(1)(vi) of the Act. The ld. AR also contended that the said receipt from VSL
was otherwise a business income which cannot be taxed in India for the reason that the
assessee does not have a permanent establishment in India and, hence, will not be liable
5 ITA No. 2643/Mum/2022 (A.Y. 2012-13) Dialog Axiata PLC vs. Dy. CIT(IT) to be taxed in India under Article 7 of the DTAA. The ld. AR contended that the lower
authorities have relied on Explanation 5 and 6 of section 9(1)(vi) inserted by Finance
Act, 2012 w.ef. 01.06.1976 which has widen the scope of ‘royalty’ and stated that the
same would be applicable to the assessee in the absence of any amendment in the
provisions of DTAA between India-Sri Lanka. The ld. AR relied on the decision of
Hon’ble Karnataka High Court in the case of M/s. Vodafone Indea Limited (in ITA No.
160 of 2015 and others vide order dated 14.07.2023) which was subsequently merged
with Idea Cellular Ltd. where the Hon'ble High Court reversed the order of the Bangalore
Tribunal holding that the interconnectivity usage charges are not chargeable to tax as
‘royalty’. The ld. AR also relied on the decision of the co-ordinate bench in the case of
M/s. Telefonica UK Limited vs. Dy. CIT (in ITA No. 771/Mum/2023 & 772/Mum/2023
vice order dated 22.09.2023), Bharti Airtel Ltd. vs ITO 178 TTJ 708 (Del-Trib.), Bharat
Sanchar Nigam Ltd. vs. Addl. CIT 191 TTJ 393 (Del-Trib.), Engineering Analysis Centre
of Excellence (P.) Ltd. v. CIT [2021] 125 taxmann.com 42 (SC), New Skies Satellite NV
vs ADIT (2009) (126 TTJ 1) (Delhi Tribunal) and Vodafone South Ltd. vs. Dy. DIT
(supra) which on identical facts has held in favour of the assessee.
The learned Departmental Representative ('ld.DR' for short), on the other hand,
controverted the said facts and contended that the receipts pertaining to the payment by a
resident of India which is not carrying on any business or profession outside India is
deemed to have accrued in India which categorically holds such receipt as ‘royalty’. The
ld. DR further contended that the income which has accrued to the assessee is sourced
from India which is from the subscriber who is located within India using the Indian
6 ITA No. 2643/Mum/2022 (A.Y. 2012-13) Dialog Axiata PLC vs. Dy. CIT(IT) network. The ld. DR further contended that the assessee’s case would not fall under the
exception to section 9(1)(vi)(b) of the Act. The ld. DR further argued that the assessee
has relied on the decision of the Hon'ble Apex Court in the case of Engineering Analysis
Centre of Excellence (P (supra) in which the Revenue has filed review petition against
the said decision and as the same has not attend finality reliance cannot be placed on the
said decision of the assessee. The ld. DR relied on the decision of Hon’ble Madras High
Court in the case of Verizon Communications Singapore Pte. Ltd. vs. ITO [2014] 361 ITR
575 (Mad) and the orders of the lower authorities.
We have heard the rival submissions and perused the materials available on
record. It is observed that the assessee being a non resident company is a licensed
telecommunication service provider within and outside Sri Lanka and providing
international carriage and connectivity services to telecom operators of other countries
for facilitating seamless connectivity and carriage of international telecommunication
traffic in Sri Lanka. The assessee has provided the said services to VSL which is a
licensed telecommunication service provider in India vide an agreement for providing
services of connecting international calls originating from India on the network of
Vodafone through the network of the assessee. The assessee connects the call carried by
Vodafone through its International Long Distance (ILD) network to the user in Sri Lanka.
The assessee’s contention is that as per the service agreement entered into by the assessee
and Vodafone, the calls originating in India of Vodafone are connected with the network
of the assessee to reach out to the destination in Sri Lanka where Vodafone has no access
to the network or the relevant process or the equipment of the assessee which are used
7 ITA No. 2643/Mum/2022 (A.Y. 2012-13) Dialog Axiata PLC vs. Dy. CIT(IT) solely by the assessee only. The assessee receives IUC charges for providing such
services to Vodafone and had received Rs.4,16,80,240/- during the year under
consideration as IUC charges. The assessee’s case was reopened vide notice u/s. 148 of
the Act dated 28.03.2019 by the ld. A.O., Bangalore for the reason that the IUC charges
received by the assessee from VSL has escaped assessment and subsequently was
transferred to the A.O., Mumbai who issued show cause notice dated 14.09.2021 seeking
for explanation as to treating the IUC charges as “royalty” or “FTS” as per the provision
of IT Act/DTAA between India and Sri Lanka. The assessee vide its reply stated that the
IUC charges does not pertain to any right, property or information as warranted u/s.
9(1)(vi) of the Act and the assessee further contended that the IUC charges even
otherwise is not chargeable to tax as per the provisions of Article 12 of India Sri Lanka
DTAA and that the amendment to section 9(1)(vi) of the Act in Explanation 5 & 6 are not
applicable to the assessee’s case for the reason that as per section 90(2) of the Act, the
provision of Article 12 of DTAA is more beneficial to the assessee than the explanation
to section 9(1)(vi) of the Act. The assessee further reiterated that the calls originating
from India through Indian network is terminated on the network of the assessee in which
case the IUC charges does not accrue in India.
The ld. A.O. not convinced with the submission made by the assessee held that
the right to receive IUC charges emanates from a caller in India and, therefore, accrues in
India till the said call is terminated on the network of the assessee, thereby holding that
the IUC charges is sourced out of India and, hence, the income accrues in India. The ld.
A.O. further held that as per the provision of section 9(1)(vi) of the Act, Vodafone being
8 ITA No. 2643/Mum/2022 (A.Y. 2012-13) Dialog Axiata PLC vs. Dy. CIT(IT) a telecom operator in India has made payment to a non resident telecom operator (NTO),
i.e., the assessee which has earned income out of subscriber in India by way of
interconnectivity which the ld. A.O. terms it to be a “process”. The ld. A.O. further held
that post insertion of Explanation 5 to section 9(1)(vi) of the Act the payer need not have
direct control or physical possession over the right, property or information and that the
said process need not be a secret process. Further the explanation 6 to section 9(1)(vi) of
the Act was with retrospective effect from 01.06.1976. The ld. A.O. relied on the decision
of the Hon’ble Madras High Court in the case of Verizon Communications Singapore
Pte. Ltd. (supra) where the payment made towards interconnect charges are held to be
consideration in respect of a “process” both under I T Act as well as under DTAA. The
ld. A.O. also placed reliance on the decision of the Tribunal in the case of New Skies
Satellite NV (supra) and Vodafone South Ltd. vs. Deputy Director of Income-tax
(International Taxation) [2015] 53 taxmann.com 441 (Bangalore - Trib.) which has held
such receipt to be taxable as “royalty” as per the provision of I T Act and DTAA. The ld.
A.O./DRP held the same to be in the nature of “royalty”.
In the above factual matrix, the primary issue that has to be dealt with is whether
the IUC charges received by the assessee is in the nature of royalty under the Act and
India-Sri Lanka DTAA. For the purpose of deciding this issue, it is pertinent to
summarize the assessee’s contention that the interconnect service does not permit the use
of or transfer of right to use any of assessee’s patent, model, design, secret formula or
process or trade mark, etc. which are exclusively in possession or control of the assessee.
There is also no use of equipment of the assessee by VSL and does not involve any
9 ITA No. 2643/Mum/2022 (A.Y. 2012-13) Dialog Axiata PLC vs. Dy. CIT(IT) ancillary services pertaining to the use or transfer of right to use of a process/equipment.
The assessee also challenges the retrospective amendments brought into section 9(1)(vi)
of the Act and that the assessee would be covered by the exception provided in section
9(1)(vi)(b) of the Act. The assessee further relied on various decisions which has
reiterated that in the absence of amendment in DTAA, the provision of section 90(2) of
the Act would be applicable to the extent where the provision is more beneficial to the
assessee.
The Revenue, on the other hand, has placed reliance on the decision of the
Hon’ble Madras High Court in the case of Verizon Communications Singapore Pte. Ltd.
(supra) which has held that the consideration paid towards IUC charges would fall under
the ambit of “royalty”. The Revenue has also relied on the Bangalore Tribunal decision in
the case of Vodafone South Ltd. (supra) and has extensively relied on Explanation 5 to
section 9(1)(vi) of the Act where there is no requirement of direct control or physical
possession over a right or property or information and that section 9(1)(vi), Explanation
2(iii) along with Explanation 6 & 6 has not specified about any transfer, i.e., required to
hold the same to be “FTS/royalty”. It is trite to look into the provisions which have dealt
with these aspects for which Explanation 5 and 6 inserted by Finance Act, 2012 to section
9(1)(vi) of the Act along with Article 12 of DTAA are extracted hereunder for ease of
reference:
Income deemed to accrue or arise in India. 9. (1) The following incomes shall be deemed68 to accrue or arise in India :— (vi) income by way of royalty82 payable by— (a) the Government ; or (b) a person who is a resident, except where the royalty is payable in respect of any right, property or information used or services utilised for the purposes of a
10 ITA No. 2643/Mum/2022 (A.Y. 2012-13) Dialog Axiata PLC vs. Dy. CIT(IT) business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India ; or (c) a person who is a non-resident, where the royalty is payable in respect of any right, property or information used or services utilised for the purposes of a business or profession carried on by such person in India or for the purposes of making or earning any income from any source in India :
Explanation 5.—For the removal of doubts, it is hereby clarified that the royalty includes and has always included consideration in respect of any right, property or information, whether or not— (a) the possession or control of such right, property or information is with the payer; (b) such right, property or information is used directly by the payer; (c) the location of such right, property or information is in India.
Explanation 6.—For the removal of doubts, it is hereby clarified that the expression "process" includes and shall be deemed to have always included transmission by satellite (including up-linking, amplification, conversion for down-linking of any signal), cable, optic fibre or by any other similar technology, whether or not such process is secret;] (vii) income by way of fees for technical services88 payable by— (a) the Government ; or (b) a person who is a resident, except where the fees are payable in respect of services utilised in a business or profession carried on by such person88a outside India or for the purposes of making or earning any income from any source outside India ; or (c) a person who is a non-resident, where the fees are payable in respect of services utilised in a business or profession carried on by such person in India or for the purposes of making or earning any income from any source in India
xxxxxxxxxxxx
ARTICLE 12 ROYALTIES AND FEES FOR TECHNICAL SERVICES 1. Royalties or fees for technical services arising in a Contracting State and paid to resident of the other Contracting State may be taxed in that other State. 2. However, such royalties or fees for technical services may also be taxed in the Contracting State in which they arise, and according to the laws of that State, but if the beneficial owner of the royalties or fees for technical services is a resident of the other Contracting State the tax so charged shall not exceed 10 per cent of the gross amount of the royalties or fees for technical services. 3. (a) The term "royalties" as used in this Article means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films or films or taps or discs used for television or radio broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for the use of, or the right to us industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience. (b) The term "fees for technical services" as used in this Article means payments of any kind, other than those mentioned in Articles 14 and 15 of this Agreement as consideration for
11 ITA No. 2643/Mum/2022 (A.Y. 2012-13) Dialog Axiata PLC vs. Dy. CIT(IT) managerial or technical or consultancy services, including the provision of services of technical or other personnel. 4. The provisions of paragraph 1 and 2 shall not apply if the beneficial owner of the royalties or fees for technical services being a resident of a Contracting State, carries on business in the other Contracting State in which the royalties or fees for technical services arise, through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated there in, and the right or property in respect of which the royalties or fees for technical services are paid is effectively connected with such permanent establishment or fixed base. In such case the provisions of Article 7 or Article 14, as the case may be, shall apply. 5. (a) Royalties and fees for technical services shall be deemed to arise in a Contracting State when the payer is that State itself, a political sub-division, a local authority, or a resident of that State. Where, however, the person paying the royalties or fees for technical services, whether he is a resident of a Contracting State or not has in a Contracting State a permanent establishment or a fixed base in connection with which the liability to pay the royalties or fees for technical services was incurred, and such royalties or fees for technical services are born by such permanent establishment or fixed base, then such royalties or fees for technical services shall be deemed to arise in the Contracting State in which the permanent establishment or fixed base is situated. (b) Where under sub-paragraph (a) royalties or fees for technical services do not arise in one of the Contracting States, and the royalties relate to the use of or the right to use, the right or property, or the fees for technical services relate to services performed, in one of the Contracting States, the royalties or fees for technical services shall be deemed to arise in that Contracting State. 6. Where, by reason of a special relationship between the payer and the beneficial owner or between both of them and some other person, the amount of the royalties or fees for technical services, having regard to the use, right or information for which they are paid, exceeds the amount which would have been agreed upon by the payer and the beneficial owner in the absence of such relationship, the provisions of this Article shall apply only to the last-mentioned amount. In such case, the excess part of the payments shall remain taxable according to the laws of each Contracting State, due regard being had to the other provisions of this Agreement.
In the above said provision, Explanation 5 & 6 being clarificatory in nature
which has elaborated “royalty” to be right property or information whether or not the
same is in possession or control and is used by the payer. It has also clarified that the
process includes transmission by satellite, cable optic fiber or any other similar
technology whether the said process is secret process or not. The said explanations to
section 9(1)(vi) of the Act relied upon by the lower authorities inserted by Finance Act,
2012 has not been adopted in the provisions of DTAA where the assessee contends that
section 90(2) would be applicable with regard to the beneficial provision of DTAA which
12 ITA No. 2643/Mum/2022 (A.Y. 2012-13) Dialog Axiata PLC vs. Dy. CIT(IT) would prevail over the provisions of I. T. Act. It is trite to reproduce the said provision
hereunder for ease of reference :
Agreement with foreign countries or specified territories. 90(2) Where the Central Government has entered into an agreement with the Government of any country outside India or specified territory outside India, as the case may be, under sub- section (1) for granting relief of tax, or as the case may be, avoidance of double taxation, then, in relation to the assessee to whom such agreement applies, the provisions of this Act shall apply to the extent they are more beneficial to that assessee.
The issue here is whether Explanation 5 & 6 are to be read into the DTAA
entered into between India and Sri-Lanka. The ld. A.O. relied on the order of the
Bangalore Tribunal in the case of Vodafone South Ltd. (supra) which has held that the
consideration paid by VSL to the assessee as IUC/bandwidth charges for the
interconnected service would fall within the ambit of ‘Royalty’ for which VSL was
bound to deduct TDS on such payment. The ld. A.O. also relied on the decision of the
Hon’ble Madras High Court in the case of Verizon Communications Singapore Pte. Ltd.
(supra) which has held the same to be as ‘Royalty’ within the meaning of clause (iii) of
Explanation 2 to section 9(1)(vi) of the Act. The lower authorities have also held that the
decision of the Hon'ble Supreme Court in the case of Engineering Analysis Centre of
Excellence (P.) Ltd. (supra) has not been taken into consideration for the reason that the
Revenue has filed a review petition before the Hon'ble Apex Court. It is pertinent to point
out that the Hon’ble Karnataka High Court in the case of M/s. Vodafone Idea Limited
(supra) which decision has relied on by the lower authorities has been reversed by the
Hon'ble High Court by holding that the provision of section 9(1)(vi) of the Act inserting
the Explanation should not be considered when the same is less beneficial to the assessee
as per section 90(2) of the Act and that the provision of the Act cannot be read into the
13 ITA No. 2643/Mum/2022 (A.Y. 2012-13) Dialog Axiata PLC vs. Dy. CIT(IT) provision of DTAA unless there has been a specific amendment carried out in the
provision of DTAA. The Hon’ble Karanataka High Court has placed reliance on the
decision of the Hon'ble Apex Court in the case of Engineering Analysis Centre of
Excellence (P.) Ltd. (supra). The relevant extract of the said decision is cited hereunder
for ease of reference:
We have carefully considered the rival contentions and perused the records. 13. Undisputed fact of the case are, Assessee is an ILD license holder and International Responsible for providing connectivity to calls originating/terminating outside India. Assessee has entered into an agreement with NTOs for international carriage and connectivity services. According to the assessee, payment made to NTOs is towards inter-connectivity charges. 14. Assessee has also entered into a CTA with a certain Belgium entity arrangement with the Omantel for utilisation of bandwidth. Omantel transferred certain portion of its capacity to Belgacom and Belgacom had in turn transferred a portion of its capacity to the assessee. 15. Admittedly the equipments and the submarine cables are situated overseas. To provide ILD calls, assessee had availed certain services from NTOS. It is also not in dispute that Belgacom, a Belgium entity with whom assessee has entered into an agreement does not have any 'permanent establishment' in India. 16. Shri. Pardiwala contended that the payments made by assessee cannot be treated as either Royalty or FTS or business profits as no part of the activity was carried out in India. Revenue's reply to his contention is that, the income belongs to the payee. If, in the opinion Of asSessee, tax was not deductible, he ought to have approached the AO for the nil deduction certificate. It is also the further case of the Revenue that the agreement between assessee and the payee did not specify that income was not taxable. 17. The first question is whether the ITAT was aorrect in holding that DTAA cannot be considered under Section 201 of the Act. It was argued by Shri. Percy Pardiwala that this issue is covered by the decision in GE Technolgy. We may record that a DTAA is a sovereign document between two countries. In GE Technology, the Apex Court has held as follows: “7. .....while deciding the scope of Section 195(2) it is important to note that the tax which is required to be deducted at source is deductible only out of the This is the underlying principle chargeable of Section 195. Hence, apart from Section 9(1), Sections 4, 5, 9, 90, 91 as well as the provisions of DTAA are also Source relevant, while applying tax deduction at provisions.” (Emphasis supplied) 18. The above passage has been extracted in Engineering Analysis. Thus it is clear that an assessee is entitled to take the benefit under a DTAA between two countries. Hence, the ITAT'S view that DTAA cannot be considered in proceedings under Section 201 of the Act is tenable. 19. The second question for consideration is whether the ITAT was Correct in holding that the amendment to provisions of Section 9(1) (vi) inserting the Explanations will result in amendment of DTAA. The answer to this question must be in the negative because in Engineering Analysis, the Apex Court has held that Explanation 4 to Section 9(1)(vi) of the Act is not
14 ITA No. 2643/Mum/2022 (A.Y. 2012-13) Dialog Axiata PLC vs. Dy. CIT(IT) clarificatory of the position as on 01.06.1976 and in fact expands that position to include what is stated therein vide Finance Act, 2012. 20. The Explanation 5 and 6 to Section 9(1)(vi) of the Act has been inserted with effect from 01.06.1976. This aspect has also been considered in Engineering Analysis holding that the question has been answered by two Latin Maxims, lex no cogit ad impossibilia i.e. the law does not demand the impossible, and impoten tia excusat legem i.e. when there is disability that makes it impossible to obey the law, the alleged disobedience of law is excused and it is held in Engineering Analysis as follows: "85. It is thus clear that the "person" mentioned in section 195 of the income Tax Act cannot be expected to do the impossible, namely, to apply the expanded definition of "royalty" inserted by explanation 4 to Tax Act, for the section 9(1)(vi) of the Income assessment years in question, at a time when such explanation not actually and factually in the statute. " "100. A/so, any ruling on the more expansive language contained in the explanations to section 9(1) (vi) of the Income Tax Act would have to be ianored if it is wider and less beneficial to the assessee than the definition contained in the DTAA, as per section 90(2) of the Income Tax Act read with explanation 4 thereof, and Article 3(2) of the DTAA....." 21. The third question is, whether the payments made to NTOS for providing interconnect services and transfer of capacity in foreign countries is chargeable to tax as royalty. It was argued by Shri. Pardiwala, that for subsequent years in assessee's own case, the ITAT has held that tax is not deductable when payment is made to non-resident telecom operator. This factual aspect is not refuted. Thus the Revenue has reviewed its earlier stand for the subsequent assessment years placing reliance on Viacom etc, rendered by the ITAT. In that view of the matter this question also needs to be answered against the Revenue.
The fourth question is whether the Income Tax Authorities have jurisdiction to bring to tax income arising from extra-territorial source. Admittedly, the NTOS have no presence in India. Assessee's Belgacom, a Belgium entity which had made certain arrangement with Omantel for utilisation of bandwidth. In substance, Belgacom has permitted utilisation of a portion of the bandwidth which it has acquired from Omantel. It is also not in dispute that the facilities are situated Outside India and the agreement is with a Belgium entitywhich does not have any presence in India. Therefore, the Tax authorities in India shall have no jurisdiction to bring to tax the income arising from extra-territorial source. 23. The fifth question is whether the Revenue is right in holding that withholding tax liability should be levied at a higher rate. It was contended Shri. Pardiwala that this issue is covered in assessee's favour in cIT Vs. M/s. Wipro6 and the same is not disputed. Hence, this question also needs to be answered against the Revenue. 24. The sixth question is whether assessee can be held liable for non-reduction of tax at source for payments made for the A.Ys. on the basis of amendment to Section 9(1) (vi) of the Act. This aspect has been considered by us while answering question No.2. It is held in Engineering Analysis that an assessee is not obliged to do the impossible,Admittedly, the A.Y.s under consideration are 2008-09 to 2012-13 and the Explanation has been inserted by Finance Act, 2012. In addition, we have also held that assessee is entitled for the benefits under DTAA.
15 ITA No. 2643/Mum/2022 (A.Y. 2012-13) Dialog Axiata PLC vs. Dy. CIT(IT) 15. From the above observation, it is pertinent to note that the Hon’ble Karantaka
High Court in the case of Vodafone South Ltd. (supra) to whom the assessee has received
the IUC charges has held that the assessee is entitled to take benefit under DTAA and that
the amendment to provision of section 9(1)(vi) inserting the Explanation cannot be read
into the provisions of DTAA by relying on the decision of the Hon'ble Apex Court in the
case of Engineering Analysis Centre of Excellence (P.) Ltd. (supra). It is also pertinent to
point out that the lower authorities have relied on the decision of the Tribunal in the case
of Vodafone South Ltd. (supra) which has now been reversed by the Hon'ble High Court
thereby holding that the order of the lower authorities to be perversed.
We would also place reliance on the decision relied upon by the assessee in the
case of New Skies Satellite BV [2016] 382 ITR 114 (Del) where the Hon’ble Delhi High
Court has held that the provision of the DTAA cannot be altered unless by way of
amendment through bilateral renegotiation after duly considering the decision of Hon’ble
Madras High Court in the case of Verizon Communications Singapore Pte. Ltd. (supra)
relied upon by the Revenue. It has also held that the amendment or change in a domestic
law cannot result in change in the provision of DTAA unless specific amendment is
brought about in DTAA. The assessee has also placed reliance on the decision of Hon'ble
Jurisdictional High Court in the case of Reliance Infocomm Ltd. (in ITXA No. 1395 of
2016 vide order dated 05.02.2019) and various cases which has held this issue in favour
of the assessee. The relevant extract of the decision of the Hon'ble Delhi High Court in
the case of New Skies Satellite NV (supra) is extracted hereunder for ease of reference:
Consequently, since we have held that the Finance Act, 2012 will not affect Article 12 of the DTAAs, it would follow that the first determinative interpretation given to the word "royalty" in Asia Satellite, when the definitions were in fact parimateria (in the absence of any
16 ITA No. 2643/Mum/2022 (A.Y. 2012-13) Dialog Axiata PLC vs. Dy. CIT(IT) contouring explanations), will continue to hold the field for the purpose of assessmPa1 preceding the Finance Act, 2012 and in all cases which involve a Double Tax Avoidance Agreement unless as DTAAs are amended jointly by both parties to incorporate income from data transmission Services as partaking of the nature of royalty. or amend the definition in a manner so that such income automatically becomes royalty. It is reiterated that the Court has not returned a finding on whether the amendment is in fact retrospective and applicable to cases preceding the Finance Act of 20 12 where there exists no Double Tax Avoidance Agreement.
Apart from the grounds of applicability of amendment to section 9(1)(via) and
the DTAA between India-Sri Lanka It is observed that the Delhi Tribunal in the case of
Bharti Airtel Ltd. (supra) and Bharat Sanchar Nigam Ltd. (supra) has held that the
payment made towards interconnect usage charges to foreign telecom operators does not
accrue or arise in India and in the absence of any permanent establishment in India could
not be brought to tax in India under Article 7 of DTAA.
From the above observation, we deem it fit to allow ground no. 6 raised by the
assessee. As we have decided this appeal in favour of the assessee on the merits of the
case, the other grounds which have not been argued by the counsels, requires no
adjudication and are academic in nature.
In the result, the appeal filed by the assessee is allowed.
Order pronounced in the open court on 15.01.2024
Sd/- Sd/-
(Om Prakash Kant) (Kavitha Rajagopal) Accountant Member Judicial Member Mumbai; Dated : 15.01.2024 Roshani, Sr. PS
17 ITA No. 2643/Mum/2022 (A.Y. 2012-13) Dialog Axiata PLC vs. Dy. CIT(IT)
Copy of the Order forwarded to : 1. The Appellant 2. The Respondent 3. CIT - concerned 4. DR, ITAT, Mumbai 5. Guard File BY ORDER,
(Dy./Asstt. Registrar) ITAT, Mumbai